Bootstrapping or fundraising? How to choose?

Grow, grow and grow again! This is the only priority a start-up should have once its team validates the product-market fit. Often, we have the tendency to evaluate the growth level of a business based on the capital raised or on its number of employees. In reality, the most important criterion remains the number of regular paying customers. Launching an innovative product requires a good dose of courage and a seamless investment from the founding team. To achieve their objectives, we will see that there are two main philosophies of growth adopted by business owners.

Bootstrapping

Bootstrapping techniques consist of developing a start-up as far as possible without resorting to external capital from venture capitalist funds. More and more founders are moving towards this type of model for different reasons. Some prefer to keep control of their business and refuse to share their « baby » with anyone. This behaviour can be likened to a lack of maturity of the founding team which is all the more perilous as the barriers of entry of a start-up are low. The main objective of a capital injection is above all to allow the growth of a business and to surpass its competitors.

On the other hand, we find the category of founders who consider bootstrapping as a transitional stage. Often, a single FF round (Family and Friends) obtained from relatives allows the team to build and market a product. The business can therefore survive via the cheapest source of financing; gross margin. By re-injecting cash in the company, the structure focuses on the most vital functions of the business and imposes a sobriety that allows a slow but steady development. It reminds the Greek myth of Tantalus who surrounded by water couldn’t quench his thirst. Similarly, founders have access to sources of investment but would not like to touch it. This self inflicted diet shouldn’t last too long though. Ideas move at great speed and it has never been easier in the interconnected world to copy business models. At a point in the life of any project, the team realizes the product finally fits the market needs and that it is now time to raise funds to accelerate its growth, reach more customers and keep the competition at bay.

Fundraising

Fundraising is often seen as a haze. The « serial entrepreneurs » revere this step as an entrance exam for entrepreneurial exam and first time founders see it as a step that will take their business to the next level. The reality is that investors come into a business to grow their capital. To achieve this, the investor will make sure he will keep control over the company and founding team will dilapidate the company. It is very difficult to strike a balance between too much control and too little but we realize that there are a lot of human factors in these relationships. One Private Equity manager used to tell me: « Investing in a business is like a marriage except that you can be certain there will be a divorce at the end. »

The investor is there to bring capital but mainly to sell his shares and take his profits in due time. Emphasising on the change of attitude, we hear more and more young entrepreneurs talking about « Smart Money ». They seek not only the investor who will provide the funds but also the one who will be able to provide the necessary contacts. One of the main criteria of investment in a startup is often claimed to be the team and it seems perfectly logical that the reciprocal is also true.

Pitfalls to avoid

These two growth models are very complementary and must be used according to the life phase of the product. In reality, we realize that the teams build a business plan, try to stick to it but never really manage to sell as planned. In this case, the whole plan collapses, the need to find investors becomes very pressing and takes the efforts of a large part of the team. It is the moment where there is little going on in development side and the whole team begins to have the head under water. Teams are vulnerable and VCs are in a position of strength during negotiation. This is a situation every founder wants to avoid! Fundraising is often an unavoidable step in the life of a start-up, but should only take place after the product has been developed and traction has been shown. A bootstrapping phase will allow the founding team to derisk their product and generate first sales. At that point, the valuation of a company will inflate significantly and will make the fund raising more favourable to the founders.

Article published by B-Scaled team.

By | 2017-08-21T08:52:32+02:00 août 18th, 2017|Articles Blog|2 Comments